The Greatest Resource Shortage You’ve Never Heard of

Long-time readers know I like investing in food production. It’s a good place to be in general, for some simple reasons.

One of my favorites is to look at how diets have shifted over time. China, India, and the rest of the emerging markets have gotten a lot bigger in the last decade. They’ve gotten richer. As part of that, they are eating a more calorie-rich diet.

So, as these countries eat more calories, they will propel investment in agriculture and food production. There’s opportunity here.

Along those lines, as food prices continue to climb, the price of phosphate rock ought to follow. That’s because it is crucial to the world’s food supply, for which it serves as a fertilizer, and there is no replacement.

On the supply side, a good chunk of the world’s phosphate resources lies in questionable political circumstances. I’m talking about North Africa, which accounts for 80 percent of the world’s phosphate supply. For the past two years this region has been smack-dab in the middle of the turmoil.

Most of the world’s mines are in decline, too. Foreign Policy magazine called it “the gravest resource shortage you’ve never heard of.” Phosphate helps plants develop stronger roots and use water more efficiently. It improves yields and gets plants to mature faster. To get it, you have to mine it. And there are only so many large-scale deposits around. This brings us to our opportunity.

A little over a year ago I visited one of the most promising new phosphate deposits in the United States, not far from Bear Lake, Idaho. Here’s a recap of what I found…

Reporting from Bear Lake

The waters of Bear Lake are turquoise blue, thanks to limestone deposits suspended in the water. It is beautiful country, once the stomping grounds of Shoshone tribes. A smooth-riding Pilatus PC-12 from Salt Lake City took me there.

I was in Idaho to have a look at Stonegate Agricom’s Paris Hills property. Paris Hills is one of two phosphate deposits Stonegate is working on. The other is the Mantaro deposit in Peru.

The Paris Hills property is in an area where there has long been mining. Exploration in these parts began in the 1900s. In fact, there are three old shafts on the property from mines operated intermittently until the 1940s.

Within 50 miles of Paris Hills, there are three active phosphate mines owned by Monsanto, Agrium, and Simplot. (The latter is one of the largest privately held companies in the world.) This is important because it means there is infrastructure all around (roads, rail, and power). There is plenty of water. Everything that you need to build a successful mine.

Stonegate bought the property in 2009 from a distressed seller, a firm called RMP Resources, which bought the property to explore for vanadium. RMP bought it from Earth Sciences, which did extensive evaluations of the property in the 1970s, drilling 46 holes. Stonegate paid only $4 million for the property and began drilling in 2010. Stonegate’s emphasis, from the start, was to develop a phosphate resource.

Looking at the maps of Paris Hills made me think about the importance of the railroads in making or breaking towns in American history. Montpelier, northeast of Paris Hills, is the largest town in Bear Lake County, with nearly 3,000 people. Pioneers settled it in 1863, arriving by way of the Oregon Trail.

Stonegate could truck the phosphate up to Montpelier, and then it would likely go to Florida (to the big fertilizer company, Mosaic) or perhaps to a seaport on the West Coast, from where it could go anywhere. There used to be a railroad from Montpelier to Paris, but the rails were pulled for scrap. The bed is still there though.

When the West was still a blank canvas, towns sprouted up, sometimes for no reason other than there was a railroad junction or terminal there. Railroad magnates had considerable influence over the towns that dotted the prairies and plains. James J. Hill, the magnate behind the Great Northern, once got the town of Spokane to knuckle under to his demands. Back in 1892, he threatened to have his railroad go around the town, a practical death sentence. Spokane caved.

My own hometown of Gaithersburg, Maryland, began in 1765 as Log Town. There was not much here but farms and orchards until William Gaither convinced the B&O to build its line through the town in 1873. It was such a big deal the people named the town after him.

On the map, I found the airport where I arrived. From there, I then rode through the small town of Paris, population 576. It has an impressive sandstone tabernacle, completed in 1889, with a capacity nearly four times the town’s population. We then drove down through Bloomington, a town half the size of Paris, and then over to the property. These towns are mostly economically depressed, and Stonegate has found a welcome reception (particularly from the local restaurants).

The Paris Hills property is set back in the hills, in rolling ranch land covered with sagebrush and wildflowers. Stonegate was still drilling on the site while I was there. Save for the two rigs, the property looks much like it did to the pioneers who came here in their covered wagons. If anything, the land looks more inviting than it was. Winters could be harsh. As I gazed out over the pretty view, I thought how hard it must’ve been to carve out a living here initially. It’s not like there was a Home Depot and Safeway nearby. It made me think that America is still a big place in its vast and relatively empty middle. As Stonegate is proving, there is still much wealth in the land.

The Paris Hills deposit itself sits in a formation that occurs mostly in southeast Idaho and has an estimated 146 billion tonnes of phosphorous. The geology of Idaho is interesting, as it was once the western shoreline of Pangaea, the supercontinent that existed 250 million years ago. As the Earth’s crusts shifted and pushed west, the collisions created the Rocky Mountains, as if you pushed one rug into another. This explains the marine phosphorite rock found in this corner of Idaho, along with dark shale and black carbonite.

The deposit itself has extremely high grades. They are high enough, in fact, that Stonegate ought to be able to ship concentrate directly with little or no processing, which means lower costs. The deposit is uniform and predictable, another attractive feature.

I stopped in to visit Stonegate’s office in Paris Hills, which sits next to an antique store selling all kinds of cool things, including World War II flight jackets, steel helmets, and even a stuffed mountain lion. Over lunch, we talked about what the mine might look like. Paris Hills could produce one million tonnes per year for 15 years just from the lower zone. The upper zone could add another 15 years at least.

I pay a lot of attention to who is in the stock, and who is running the show. To make a long story short, there are proven insiders here. Ian McDonald and Kerry Knoll (co-chairmen and significant stockholders) are proven company builders. They have created and sold companies and made a lot of money for their investors. They have done it not once, not twice, but three times.

Stonegate Agricom is an example of the natural wealth still here in America if only we tap it. The irony is not lost on me that the company’s management team and primary backers are Canadians. You can find a lot of little companies doing interesting things with old U.S. assets, Stonegate is one of them.

Chris Mayer is managing editor of the Capital and Crisis and Mayer's Special Situations newsletters. Graduating magna cum laude with a degree in finance and an MBA from the University of Maryland, he began his business career as a corporate banker. Mayer left the banking industry after ten years and signed on with Agora Financial. His book, Invest Like a Dealmaker, Secrets of a Former Banking Insider, documents his ability to analyze macro issues and micro investment opportunities to produce an exceptional long-term track record of winning ideas. In April 2012, Chris released his newest book World Right Side Up: Investing Across Six Continents.

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